Earnings Call: Q4 2015

Jan 29, 2016

Thank you very much. Hi, people. So welcome to our Nudnet Q4 and Full Year Report. We are happy to present another strong quarter, finalizing a really good 2015. Next slide please. So for the quarter, revenue was up by 14%, giving us an operating profit increase by 18%. And for the full year, that resulted in a revenue increase by 15% and a profit after tax, up by 29%. And actually that giving us in Nordnet's history the most profitable year ever. Next slide, please. So some highlights from Q4 2015. In Sweden, we launched Nonet Supermarket, commission free trading in over 6,000 exchange traded products. We're really happy with that launch and we will see more transactions going through and going forward. Norde's customers carried out 5 point 7,000,000 transactions, a record for the quarters. Lending exceeded environment that we are operating in puts pressure on our net interest income. We have excess deposits and every krona, DKK, NOK or euro that we can lend gives us a better return. So we're happy with that development. And we are also happy to be able to propose an increased dividend to SEK 1 point $3,000,000 Next slide please. Growth in active customers increased by 13.4%. We are growing in all markets. Denmark standing out with a growth of over 40%. We are happy with the growth of customers in Norway and Finland, and we can do better in Sweden. We know that. Next slide please. So net savings, we're growing exponentially also there in Denmark with a growth over 40% Norway, a growth over 20% Finland that has a weak economy and kind of a locked in market, we grew 2%. And in Sweden, we had a negative growth by minus 2%. And you know that that depends on the scaled down partnership with certain partners. So if we take and that was an outflow of $7,500,000,000 over the year. So if we adjust for that, we had a 6% underlying growth in net savings in Sweden. Next slide, please. So Q4 was a super a super active quarter. Normally, Q1 is the quarter with the highest activity in the years, but not this year. And actually, it's the in Q4, we had the highest number of trades in NuveNet's history, as I said. Next slide, please. Here you see the development in our lending products, and we're really happy with that growth. And as you can see, it accelerated in the second half of the year. When it comes to our personal loans business, you remember that we had a flattening growth in the beginning of the year. We put a growth strategy in place and we have seen growth picking up in the second half. When it comes to margin lending, you might recall that we launched a new margin lending lending product called Knockout Launet in Sweden and Sulfur Launet in the other markets. And we have like seen an increase volume increase just because of that. Of course, margin lending is also positively affected by the positive trading climate. And going forward, we will continue to focus on lending. Next slide, please. And with that, I hand over to you, Jakob. Thank you, Hakan. Now for a closer look at our financial performance during the final 3 months of 2015. Total revenues amount to almost $326,000,000 in the quarter. It's up 11% compared to Q3 and 14% compared to the same quarter 2014. Looking at the different components within our revenue then. Starting at the bottom of the chart, the blue part of the bar is net interest income. Net interest income declined slightly quarter on quarter to 100,000,000 dollars And within net within the NII, there's 3 parts. Margin lending, it has developed nicely during the quarter, as Hakan mentioned, and the volumes are over $4,500,000,000 at the end of the quarter. Also personal loans show increasing volumes, and after a sluggish start, we have over 10% growth year on year. It's a little bit better than general market in our estimates, so good development there. Partly offsetting the volume increases in both these products is slightly lower rates, both for margin lending and for personnel loans. The third part of NII is our liquidity portfolio where we also see effects of lower market rates and lower yields on bonds in the portfolio. That concludes NII. The next part, the gray part of the bar, represents commission income. It's up $17,000,000 compared to the previous quarter, of course, mainly due to the high activity in the stock market. October, November, December were all quite volatile on all the 4 Nordic markets, development that normally drives activity among our customers. Number of trades is up over 40% compared to the Q4 of 2014. Commission per trade, slightly lower compared to the previous quarter. This is mainly due to a change in the mix of customers trading. As you know, we lowered our prices on the Swedish market at the end of Q2. So Q3 was a full quarter with the new price list. So the immediate effect of the price cut was mostly there already in Q3. Moving on to other income. The top part of the bar, it includes FX income generated when customers trade outside of their home market. It also includes license fees and other administratives. However, the main part of the increase from Q3 is related to a new revenue item related to our Danish business. Based on market share of trading in Danish shares during the year, the Danish CSD administers a type of fee sharing, so called the interbank Aksegivild. It totals roughly $10,000,000 in the quarter. And while it's booked in Q4, it relates to trading during all of 2015. It is a recurring fee calculated 2x per year. So we will receive this fee also going forward, but it has not been included previously. So that explains the major part of the pickup in Q4 versus previous quarter and also versus Q4 of last year when we did not have this fee. That's it for revenues. Moving on to expenses on the next slide. Thank you, operator. Expenses, including credit losses, amount to $212,000,000 for the quarter, clearly up from the previous quarter and also from the previous year. For the full year, expenses excluding credit losses increased by 7.6%. This is about $5,000,000 to $6,000,000 higher than our view at the end of the Q3. On the call then, we talked about the year on year increase around 6%. The increase since then is due to mainly two things. 1 is a deliberate decision to maintain a high pace of development and also some extra marketing spending in the quarter, taking advantage of the positive trading climate in Denmark. So a little higher than what we talked about last time we spoke. As we have spoken about during the year, the increase in cost base during 20 15 is mainly related to added resources in IT and product development areas and also the buildup of our corporate pension sales team in Sweden. We have also invested in IT infrastructure and also confidence development within the group during the year. For 2016, we expect further to build our resources in the IT and product development area, and we expect a cost increase of 6% to 8% compared to for 20 16 compared to 2015. In addition to the decision to continue to invest in the areas we just discussed, our increasing business volume also has some effect on costs. Volumes are increasing in virtually all areas. In the Q4 of 20 15, we handled roughly 20% to 40% more business volume on our platform compared to a year earlier. This is increases this increases the need for resources in areas of our operations that still include manual steps. It also affects some volume based fees and so on. So part of the cost increases is volume driven, but definitely not all of it. That's it for expenses. Next slide, have a look at operating profit. Operating profit for the 4th quarter amounts to $113,000,000 increase of 15 $1,000,000 from the previous quarter. That's up 16%. For the full year 2015, operating profit is $449,000,000 And as Hakan mentioned at the start here, it's the best full year results for Noventet ever. We won't dwell too much on that, so let's instead move on to the next slide and look at the performance per country. This slide illustrates our business across the 4 markets. All 4 markets developed very well during 2015. The charts here show that 40% to 50% of our business comes from Norway, Denmark and Finland at the end of the year. So right now, roughly half of Nordenet's customers reside outside of Sweden. Looking at operating profit, the share from Denmark, Norway and Finland is also increasing. For 2015, the 3 countries make up 41% compared to 19% during 2014. Hakan pointed this out earlier. Denmark market continues to grow with over 40% on our long term metrics, net savings and number of customers. In addition, Danish customers continue to be very active, averaging roughly twice as many trades per customer as the other markets. This leads to a very good operating margin of 49% in Denmark for 2015. Norway also has a very positive development. Going back, I'd say, 1.5 years, we managed a steady increase in growth rates, both for number of customers and for net savings. And this results in an operating profit for 2015, 4x improved from the previous year. So Nordnet is truly a Nordic operation with a strong position to continue to grow in all markets. We'll go to the next slide for a closer look at the income statement compared to corresponding periods 2014. I'll move fairly quickly through the top two sections as we've covered most of those trends in when looking at the quarterly trends. But the revenues for the 3 month period October to December totaled just under 326,000,000 dollars up 14% compared to the same period 2014 and also full year shows an increase compared to 20 are up around 15%. Increased competitors since 'fourteen are within the trading related revenue items, net commission and other income, while NII is lower compared to the same periods last year. On the expense side, $202,700,000 that's operating expenses, and it's up 13% compared to the same quarter 2014. And full year operating expenses, as mentioned earlier, up by around 6.5 6.5 6.7 percent compared to 2014 and mainly due to the increase of resources in IT and product development as well as corporate pension sales. And as mentioned earlier, outlook for next year is 6% to 8% compared to 2015. So moving down to credit losses. They are all related to our personal loans business. That's our unsecured consumer lending. Losses around almost at $10,000,000 for the 3 month period and for the year, dollars 41,300,000 It's lower than 2014, and loss level is under 2% for the full year. Partly this is due to a little bit lower risk level in the portfolio, which also affects interest rates. And as I mentioned earlier, rates are down year on year in the personal loans business. Tax rate for the Q4 is 22.7 percent. The quarter does include adjustments related to previous periods, adding on about 1.5% to the tax rate. Over time, the main factor explaining our tax rate is the business mix between our different legal entities in each country. And the countries we operate in, the tax rate ranges from the lowest in Finland at 20% to 27% in Norway. So it's that range. Well, that sums up to a profit for the period, October to December, of $87,500,000 leading to an EPS of DKK 50. And for the full year, EPS is at DKK 2.5 per share. We look at the statement of financial position on the next slide. Total assets increased since the start of the year to almost $62,000,000,000 It's mainly a consequence of deposits from the public increasing, also increasing our assets and liabilities where policy bear the risk. Policyholders bear the risk, meaning assets our customers' assets in our pension and insurance products. Increase in deposits in deposits on the liability side have affected financial assets available for sale and financial assets held to maturity. Both those items refer to our liquidity portfolio. Also loans to the public increased, as we talked about earlier, since the start of this year. Shareholders' equity amounts to 1,000,000,000 $1,874,000,000 and that brings us to the next slide where we look at our capital requirements. Walk through that from the top, starting with our capital base, made up of shareholders' equity, of course, which includes profit for this year. We deduct our proposed dividend of DKK 1.3 per share, which amounts to DKK 227,500,000. Also deducting adjustments for valuation adjustment to valuation and intangible assets, that brings us to DKK 1,244,000,000 a capital base. Compared to the end of 2014, it's slightly lower. During the year, our good results have enabled us to buy back our subordinated liabilities, which totaled $175,000,000 at the start of the year and more or less been able to replace that with retained earnings. Risk exposure amounts are slightly lower compared to 1 year ago. Lending has increased during this year, but it's offset by lower risk weight in our bond portfolio. So total exposure amounts to 7,854,000,000 dollars This gives us a total capital ratio of 15.8%, which is just within the range of 14% to 16% that we have communicated as a target for our capital ratio. That was the end of my prepared remarks. I'll hand back to Hakan for a wrap up, and we'll take questions after that. Hakan, back to you. So next slide, please. So going forward, we will continue to execute on our growth strategy. There are 3 components to that strategy. 1 is to have super happy customers and we will drive up customer satisfaction in order to have more customers recommending us to their friends, families and colleagues. We will continue to increase brand awareness and the liking of the NU Net brand in all four markets. And we will continue to innovate to get good stuff out to our customers. And when we talk about innovation, we have the recent years focused our resources on getting more products out there. We will slightly shift that now and focus more on enhanced user experience. But we will continue to market and product develop around lending products, as I said. So with that, thank you all for listening, and I guess we will open up for questions. Thank And we have the first question from Peter Wallin from Handelsbanken. Please go ahead. Your line is now open. Thank you and good morning guys. I would like to ask a question about, so like the operating profit trends in the different markets and maybe starting with Sweden, where select revenues are flat year over year, but profit rate and profit down 17% and still a relatively strong market, while you see spectacular profit growth in especially Denmark. I mean, is there some sort of like issue here of how you allocate or distribute costs? Or is Sweden so like now just taking the investments which are benefiting the whole of NordNet, but sort of like just lowering the visible operating profitability in Sweden? So maybe I can start and Jacob, please help me out. We have deliberately like invested in building up the corporate pension, occupational pension sales team, which hits the cost line. As you understand, occupational pension is a long term product. So we'll take the cost now and reap the benefits in the outer years. Also we changed the price model for stock trading over the year and that has affected the revenue line. So that is the explanation for the operating profit being down. Is that right, Jacob? Yes, I think so. There's no we haven't changed our allocation model as such. Of course, are related to volumes and other things. So the actual amounts can vary a little bit, but the actual model has not been significantly changed year on year. Okay, great. Thank you. And then just a minor more technical question on the fee sharing of the Danish custody. If it I mean, if you could give some more color there, is it reasonable to assume that it's around €5,000,000 dollars twice per year? And will that figure be relatively stable? Or do you think you could see a positive trend there if your momentum in Danish market stays? Yes. I guess the fee is related to sort of the market share or the share of trading in the different stocks. So it does vary. But providing that we can continue to increase on our market share, it should also be reflected in this fee as I understand it. So based on what we know right now, I think this is probably the level to expect, but the mechanics of it should be that way. Okay. Thank you. And it's hard to predict the activity in the customer base, right, because that is dependent on what happens on the market and actually in the world. But we can assume that or you can assume that we continue the strong growth in new active customers. Yes. Okay, good. Thank you. And then one question on the consumer lending where you've seen increased momentum over the year. How much of this is due to so like you doing a better job? And how much of this would you say is, to some extent, from competition maybe easing off a easening up on the competition, rather the opposite, right? Now I think or I do know that it's like due to our own efforts. We're growing more than the market, which was not really the case. We in the beginning of the year, we grew like the market grow, right? But then we put growth strategy in place and the growth picked up after summer. Okay. And this slightly lower margin trend due to going for a bit higher quality clients, is that something you'll continue with also going forward? Yes. I think you can expect that. Okay, great. Thank you very much. Thank you. And our next question comes from Peter Keshiakoff from Carnegie. Please go ahead. Your line is open. Thank you. Hi, guys. So a couple of questions. First one is your cost guidance where you say that you will invest more in the user experience. Can you just elaborate a bit more on what the time plan is there? And if we should expect similar or these costs will also be seen in 2017? And then you also mentioned that given, of course, the better inflow of savings that you're seeing in some of your markets and that and then the high transaction activity that it's, of course, driving costs as well. If you can just give a split of how much of the cost increase that is driven by more transaction volumes, If we can start there. Thanks. Okay. So on the first question on enhanced user experience, I believe that you will be able to see signs of a better user experience during second half of this year, twenty sixteen. On the volume, how much volume drive volume increases drives the cost increase. I think I'd be hard pressed to sort of put a specific number on it, but let's I mean, if we're saying 6% to 8% next year, and let's say, a couple 2, 3 of those could be more related to increasing volume, and the rest would be more our decision to keep sort of keep the high development pace. So sort of roughly like that. But of course, it's sometimes a little hard to say exactly what is volume driven and what's our decision. But definitely, there's some volumes do put some cost increases for us. Okay. And just relating to our follow-up questions on both actually. First on the IT or the enhanced user experience. You said we'll be able to see signs by second half of twenty sixteen, but the actual development, will that go on also for, say or will that go on for 2 years? So we'll actually see changes during 2017 as well. And perhaps I don't know if you dare to give a number, but roughly what costs are involved in doing this because from my understanding, you will also allocate some of your IT spend from other areas to enhancing your user experience? So actually, the work with enhancing user experience will go on forever, right? Our strategy is to do small incremental improvements, right. So that will go on forever, not a big bang thing, right. So again, you will see the first signs in the second half of twenty sixteen. But maybe to the second part of your question, I think we can also say that, I mean, if we look back maybe 1.5, 2 years, I mean, at that point, we saw that we needed to do improvements on the site, but we also felt that we had a couple of holes in our product portfolio and sort of chose to address those first. So that has led to the products that have come out during the last few years with Chervil, new super funds, the knockout and super loan and so forth. And if we look ahead, the coming year, we're sort of shifting a little bit more to I think it's not black and white saying that there will be no new products, but definitely our focus will be more on the user experience and the site being the most tangible thing when we say that. Okay. But just to then the last question on that. When do you think that we'll see the sites having been changed to the next level or the way you want to see it now? So, we're deliberately not saying a date because it's part of the way we want to change our way of working is to more go for, like Hakan said, incremental changes and really be faster in putting out small changes all the time. But it should we should start seeing things second half of this year, and we'll be able as soon as we start that, I guess, we'll be able to be more specific on the time plan. But sort of it's not because we don't want to say a date. It's because we intentionally don't want to set a date because we want to move towards this way of incremental development. Okay. Then just two more questions. First of all, on the savings capital that is flowing out due to the partnership with Soderber and Partners, how when do you expect that to end? And what do you think the final outflow will be? I think it's roughly SEK 7,000,000,000 so far. And then the second question is just on trading activity during the first half or during January, what kind of activity you've seen? And I guess in terms of customer behavior, have they been selling shares and then just keeping cash? Or are people actually actively trading, so buying and selling? Okay. So it's hard to say on the first question because it's really up to Cerro Varian Partners and the customers to decide whether they want to move money or not, right. But I think we said originally that we like Cerver has roughly €20,000,000,000 on the NuveNet platform and we estimated that up to right? And then during 2015, dollars 7,500,000,000 has been transferred, right? So the best guess would be another $2,500,000,000 But again, it's up to Cerro Baller and Partners and customers really to design that. But that's our best guesstimate. On the second part of your question, Peter, was that related to since now January? Or could you just repeat that part? Yes. I guess it's January related and what kind of effect we've seen from the declining equity markets and I guess some extent negative impact on sentiment in general. Yes. It's in the short term, volatility drives activity. So it's been the drop we've seen now, the 1st couple of weeks, I think has driven some activity. Then we know that over time, you have a downward trend in the market, retail investors sort of lose a little bit of interest and we definitely have, I guess, 4 or 5 really good years behind us on the exchange. So that's we're at least sort of getting closer to the end of the cycle in some way. But in the short term, it's not no dramatic effect. It's really just we've seen high activity. We've had inflows in January as well. It varies a little bit between the markets, but we'll put out the release on Monday, it is, right? Yes. So I'll give you the exact numbers then, but pretty normal development so far. But in mix terms, do you see people selling equities and then putting them on into cash? Or are they actually reinvesting it? Both. No clear trend on that. No clear trend on that. Okay. Thank you. Thank you. And our next question comes from Ulrikar Henze from Nordea. Please go ahead. Your line is open. Yes, good morning. Most of my question has actually been asked and answered. But maybe if you can give us an update on your view on competition on the market and especially regarding the development of Degiro, if you are experiencing any outflow or if they take any market share? So we start with Degiro. No, we have not seen any like effect on our customer base or our like our volumes, right. And it's surprisingly like calm and quiet in social media or in digital channels, right. Still, we are very humble when it comes to that. So we are monitoring them very closely. Otherwise, competition hasn't really changed in the market. It's like we're still clear number 1 in Denmark, clear number 1 and strengthening our position in Denmark. And in Norway, we are clear number 1. Also in Finland, where we have super happy customers, super satisfied customers and the same situation in Sweden actually, like we are clear number 2 after Avanza, but we're trying harder. So you are comfortable reiterating that you don't need to do any significant changes in your price plan in the near term future, but still it will not be more expensive to trade stocks over Internet over the upcoming years. Exactly. Well thought. Okay. Thank you. That's it. Thank you.